Thursday, 12 June 2014

Financial Blog Corliss Group Economic growth to accelerate around the world

The
World Bank's most recent Global Economic Prospects (GEP) report, released this
week, says a global economic recovery is underway, underpinned by strengthening
output and demand in high-income countries.

Global
GDP growth in 2014 will be 2.8 percent and it is expected to rise to about 4.2
percent by 2016, according to the report, which the World
Bank publishes twice a year.

Average
GDP growth in developing countries has reached 4.8 percent in 2014, faster than
in high-income countries but slower than in the boom period before the global
financial and economic crisis of 2008.

Demand side stimulus or supply side reforms?

The global economic slowdown that struck
in 2008 was caused by a financial crisis that resulted in large part from the
bursting of an enormous, fraud-ridden mortgage lending bubble in the US.

The
crisis led to varying responses in different countries. The GEP report's
authors said that in general, developing countries privileged demand stimulus
policies over structural reforms during the past several years.

For
example, in 2008 to 2009, China implemented a four trillion-renminbi ($586
billion) stimulus program as a direct response to the slowdown in global trade
caused by the global financial
crisis.

Critics
pointed to over-investment in China as a risk to continued fast growth. The
country is now struggling to contain a real estate bubble of its own.

The
World Bank wants China and other emerging countries to refocus on structural
reforms.

"A
gradual tightening of fiscal policy and structural reforms are desirable to
restore fiscal space depleted by the 2008 financial crisis," the bank's
chief economist, Kaushik Basu, has said. "In brief, now is the time to
prepare for the next crisis."

The World Bank's mantra: Fiscal discipline
and structural reforms

Yet
the World Bank is well known for nearly always prescribing fiscal
"tightening" - or cutbacks to government expenditures - and
"structural reforms."

What
is the rationale for public expenditure cutbacks? And what does the World Bank
mean by "structural reforms?"

The
World Bank consistently urges policymakers to prevent annual deficits from
growing faster than the rate of GDP growth. Rising debt-to-GDP ratios mean that
an increasing share of the public budget is devoted to servicing debt, leaving
proportionately less money available to pay for government-provided
infrastructure and services.

However,
sometimes countries fall into recession when households, in aggregate, attempt
to pay back previously incurred debt faster than they take up new debt. In the
jargon of economists, this is called "deleveraging."